- Biotech stocks can offer some of the best returns available for investors that choose them wisely.
- After a heavy pull-back in the assets recently, experts see a high chance of a resurgence soon.
- The managers of the $380 million International Biotechnology Trust have identified five key themes investors should target.
Biotech stocks can offer some of the best returns for investors as it is a sector always ripe with innovation and scientific breakthroughs that can be monetized.
After a period of stellar returns during 2020 and early 2021, as pharma companies and biotech firms around the world raced to find an effective vaccine against Covid-19, the sector saw a pullback as investors booked profits and the momentum faded.
A fresh upswing could well be on the cards though in 2022, but being such a broad sector some parts of the market will likely do much better than others.
Marek Poszepczynski and Ailsa Craig, lead investment managers of the $380 million International Biotechnology Trust, know the sector better than most. The trust also has Kate Bingham listed as a manager; the woman who lead the UK’s highly successful Covid vaccine procurement.
The stock-picking behind the fund has paid off handsomely. According to Bloomberg data, the fund has beaten 69% of its rivals over the last 10 years and 72% of its peers since 2020.
Poszepczynski and Craig have identified five key themes to target when picking stocks in the sector this year.
Return to normal (really)
“While Covid-19 may continue to dominate the news agenda this year, we are confident 2022 will usher in the end of the pandemic,” Poszepczynski said. “We are hopeful the Omicron variant will raise immunity throughout the world, without a corresponding rise in severe symptoms and deaths.”
“Increased global resilience to the virus, in combination with ongoing vaccination programmes and improved treatment options delivered by the biotech sector, should lead to a reduction in Covid-related restrictions across the world,” he said.
Poszepczynski said this would act as a boon to the biotechnology space, as companies would benefit from the resumption of standard medical activities. “Increased face-to-face interactions should also permit greater deal execution in the sector,” he said.
M&A on the rebound
“Following a flurry of deals towards the end of 2021, we are confident of a resurgence in biotech M&A this year,” Craig said. “Strong takeover activity is crucial for the biotechnology space, as it relies on mergers and acquisitions to propel innovation and disseminate drugs to those most in need. Takeovers permit an efficient division of labor, whereby nimble companies and universities specialize in innovation and are acquired by larger players, while the bigger players utilize their scale to deliver optimized drug manufacturing, distribution and marketing,” she said.
Big Pharma names are particularly well placed to take advantage of the normalization in valuations and relaxation of pandemic restrictions, as they can use their strong cash balances to replenish product pipelines, she said.
“This is crucial for dominant biotechnology players, which face constant pressure to acquire new technologies and products before the patent protections on existing drugs expire. In addition, industry leaders will be looking to keep up with the increasing demands of an ageing global population,” Craig added.
“Oncology very much remains an area of unmet medical need within the biotech space,” Poszepczynski said. “However, there are several exciting events expected during the first quarter of 2022 that could mark significant progress in fighting deadly forms of cancer.”
An IBT portfolio holding, Mirati Therapeutics, is expected to file its drug for KRAS-mutated lung cancer, which affects 10-15% of lung cancers and is a well-known driver of many solid tumours. Mirati’s drug hopes to be the best-in-class therapy, competing with Amgen, which launched its KRAS inhibitor last year.
Craig and Poszepczynski also expect to see the final clinical results from Trodelvy, a product acquired by Gilead Sciences. Trodelvy is a prescription medicine used to treat a sub-set of breast cancer patients, and evidence of success in its clinical trials would expand the patient pool and constitute major progress,” they said.
Clinical breakthroughs await
“Alongside advances in tackling cancer, 2022 could see potentially revolutionary clinical trials complete,” Craig continued. “We are anticipating critical data from gene editing companies, which could provide new avenues for treating diseases in highly precise ways by altering human genomes.”
Craig flagged Intellia Therapeutics, which is expected to present early clinical results for numerous gene editing programs. The company uses the technology to treat rare diseases including transthyretin amyloidosis, hereditary angioedema and hemophilia, as well as to allievate some of the effects of sickle cell and acute myeloid leukemia.
“We are also expecting further advances in the field of cellular therapy, whereby a patient’s immune cells are engineered to enable them to identify and kill tumor cells. Initial cell therapies are highly effective against specific cancers such as blood cancer, but their side effects mean patients often require intensive care treatment,” Craig said.
Treatment is typically long, cumbersome and expensive. One treatment that is attempting to improve on all of those is allogeneic cell therapy, which removes the need for patients to supply their own cells to be engineered.
“Instead, ‘off the shelf’ donor cells may be used, dramatically reducing the lead time to effective treatment and expanding the pool of potential patients,” Craig said.
Scientific innovation abounds
In spite of all the efforts of the community to identify, treat and prevent Covid-19 during the pandemic, innovation has expanded exponentially, Poszepczynski said.
“Despite challenging clinical trial recruitments and approval processes due to pandemic restrictions, the US Food and Drug Administration still managed to approve 50 new drugs in 2021, illustrating the continued productivity, resilience and adaptability of the sector, despite moving to a virtual world,” he said.
He added that the number of ongoing clinical trials ihas already surpassed pre-pandemic levels, with 37,033 trials registered globally at the end of December 2021, up from 30,957 at the end of 2018.
“On the demand side, the expected doubling of over 65s during the next 50 years, combined with the developing world insisting on better access to healthcare, underpins strong demand for the sector going forward,” he said.